Wage Growth is stuck at 2.5%. Why?
Economists don’t know, really. Maybe productivity is broken.
Ana Swanson takes a look at the surprisingly low growth in wages, stuck in low gear at 2.5%, the same level as in 2009 when unemployment was double today’s 5%. It should be much higher, according to economic thought. But maybe there’s another mystery behind the mystery: productivity.
We’re not getting much more productive
Other economists find different reasons for lagging wage growth. One is that gains in productivity — a measure of how much a given worker or machine can produce — have also been sluggish of late. That is a worrying sign, since productivity gains are what really determines improvements in wealth and living standards over generations.
But blaming productivity for slow wages is not a full explanation, because economists in turn debate the reasons behind sluggish productivity. Some fault measurement issues. Some point a finger at government policies that have failed to encourage investments in machinery and technology. Others say it could just be because of natural ebbs and flows in innovation.
In addition to trends in productivity, weak growth in wages may reflect the difficulty workers have asserting their bargaining position in the current environment, Lawson said.
A dramatic decline in unionization in recent decades has left workers less able to bargain with company owners for pay increases. At the same time, globalization has allowed companies to be more mobile than ever before. If labor gets too expensive in one location, companies can just move.
Neil Irwin dug into productivity recently, as I reviewed in Why is Productivity such a mystery?:
I recommend reading Irwin’s analysis, but to summarize, he basically suggests three scenarios:
1) Depressing — Irwin doesn’t use the term ‘postnormal’ but he should have. In this scenario, we are in new territory where productivity is inherently lower than in the past, and will remain so.
He doesn’t say it, but the nature of the modern world, where everything has become deeply connected to everything else, may have incorporated a subtle friction into the economic engine. As a result, it may require greater investment to make any headway in productivity.
Also, as Irwin points out, new ideas are getting harder to find (see The Hidden Economics of Ideas) so the level of investment and time needed to find breakthroughs is steadily increasing.
2) Neutral — Perhaps we just don’t know how to measure ‘productivity’, anymore. Or said differently, the nature of work may have changed so much that the tools we use don’t measure all the outputs.
3) Optimistic — While companies may be making greater investments in some areas — like driverless cars — the impact and payoff from those investments is all in the future. Additionally, more effort may be directed toward changing the way we work, or the structure of delivering value to customers. Maybe this is an era of transformation, where only after a long hard slog will we finally see the rewards of efforts made in the present.
The reality is that how and what we consider productivity is changing faster than new techniques to improve it, so we need to consider how to hold and use the ruler to measure productivity, because the ruler is changing at least as fast as everything else.
Originally published at stoweboyd.com.